JPMorgan's USD 13 billion deal hits stumbling blocks, say sources

JPMorgan Chase & Co and US Justice Department have hit snags in working out the final details of their USD 13 billion settlement over the bank's mortgage bonds, two people familiar with the talks said.

The bank and the government are arguing over whether JPMorgan should be forced to pay for mistakes made by Washington Mutual, the failed mortgage lender it bought during the financial crisis.

JPMorgan is also looking to shut down some criminal inquiries into the bank's mortgage business before the financial crisis, said one of the sources. The other source said there appeared to be a misunderstanding over whether that's what the bank wanted.

Both sources added that whatever disagreements the government and the bank may have, the talks are continuing and have not broken down.

The squabbling shows how hard it will be for JPMorgan to end the many legal problems it faces now.

Earlier in October 2013, JPMorgan and the government entered a preliminary USD 13 billion settlement to end investigations into whether the bank misled investors when it bundled subprime mortgages into bonds before the financial crisis.

Even if the USD 13 billion deal is finalized, JPMorgan faces other government probes into everything from bad derivative bets to whether it gave jobs to the children of government-owned company officials in China to secure business there.

The largest US bank said earlier in October 2013 it has set aside USD 23 billion over time to pay for legal issues. Dimon is eager to put the bank's legal issues behind it so he can focus more attention on running the company. He met with US Attorney General Eric Holder in late September in Washington to reach the tentative package deal.

The Department of Justice is leading multiple federal and state agencies that are probing the mortgage bond business of JPMorgan and two firms it acquired during the financial crisis.

On Friday, one of the agencies investigating the bank, the Federal Housing Finance Agency, grew impatient with the negotiations for the broader settlement, and separately signed a USD 5.1 billion settlement with JPMorgan.

Some USD 4 billion of that had been seen as counting toward the USD 13 billion amount.

Holder and Dimon are both overseas this week. Holder is in Morocco attending a conference and meeting with local counterparts. Dimon is traveling in Europe this week, according to a person familiar with his itinerary.

JPMorgan has been fighting with the government over the Washington Mutual issue for years.

Washington Mutual failed in September 2008, and the government encouraged JPMorgan to buy the bank, which it had been looking at for some time. Under the deal they negotiated, JPMorgan paid USD 1.9 billion for most of the mortgage lender's assets, and some of its liabilities, leaving behind a receivership at the Federal Deposit Insurance Corp to pay creditors.

FDIC feud

JPMorgan claims that the legal liabilities from Washington Mutual's mortgage bonds go to the FDIC. The government believes the legal liabilities belong to JPMorgan. A report on September 30 said that the dispute threatened the preliminary deal.

One analyst thinks JPMorgan is fighting a losing battle on this matter. "I do not believe the FDIC would accept liability related to WaMu," said Joshua Rosner, managing director of Graham Fisher & Company, a research firm.

Also at issue is whether JPMorgan could face further criminal investigations.

In a draft settlement circulated late on Sunday, JPMorgan sought to shut down any criminal inquiries into the bank's packaging and sale of mortgage securities, apart from a California probe the bank has disclosed, the first source said.

The bank had previously agreed to keep all criminal probes out of the settlement, the person added. A second person familiar with the talks said there appeared to be a misunderstanding over the issue.